<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---------
Exchange Act of 1934. For the quarterly period ended March 31, 2000.
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---------
Exchange Act of 1934. For the transition period from to
------------- ----------
Commission File Number 0-22987
-------
VALENTIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3156660
--------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
863A MITTEN RD., BURLINGAME, CA 94010
--------------------------------- ---------------------------------
(Address of principal offices) (Zip Code)
650-697-1900
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- -----------
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 29,039,331 as of April 30, 2000.
<PAGE>
VALENTIS, INC.
INDEX
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1: FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 25
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5: OTHER INFORMATION 25
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 25
Signatures 26
Exhibit Index 27
</TABLE>
Page 2 of 27
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
VALENTIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
------------ ------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,656 $ 4,785
Short-term investments 17,174 19,522
Note receivable from PolyMASC Pharmaceuticals - 1,000
Other receivables 593 1,800
Prepaid expenses and other 843 1,392
--------- ---------
Total current assets 27,266 28,499
Property and equipment, net 10,373 11,897
Long-term investments - 14,830
Goodwill 11,597 9,012
Other assets 174 189
--------- ---------
$ 49,410 $ 64,427
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,567 $ 3,691
Other accrued liabilities 854 1,309
Deferred revenue 5,658 4,914
Current portion of long-term debt 3,158 3,124
--------- ---------
Total current liabilities 12,237 13,038
Long-term debt 3,520 5,459
Commitments
Stockholders' equity:
Common stock 27 22
Additional paid-in capital 144,299 119,746
Deferred compensation, net of amortization (261) (463)
Accumulated other comprehensive gain(loss) 21 (109)
Accumulated deficit (110,433) (73,266)
--------- ---------
Total stockholders' equity 33,653 45,930
--------- ---------
$ 49,410 $ 64,427
========= =========
</TABLE>
See accompanying notes
Page 3 of 27
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Collaborative research and development revenue $ 965 $ 790 $ 4,301 $ 2,176
Research and development grant revenue 86 - 252 -
------- -------- -------- --------
Total revenue 1,051 790 4,553 2,176
Operating expenses:
Research and development 6,296 3,501 18,869 10,287
General and administrative 1,726 1,286 5,368 3,380
Acquired in-process research and development - 25,870 14,347 25,870
Amortization of goodwill 1,341 - 3,675 -
------- -------- -------- --------
Total operating expenses 9,363 30,657 42,259 39,537
------- -------- -------- --------
Loss from operations (8,312) (29,867) (37,706) (37,361)
Interest income 351 592 1,295 1,893
Interest expense and other (304) (274) (756) (618)
------- -------- -------- --------
Net loss $(8,265) $(29,549) $(37,167) $(36,086)
======= ======== ======== ========
Basic and diluted net loss per share $ (0.31) $ (2.09) $ (1.45) $ (2.73)
======= ======== ======== ========
Shares used in computing basic and diluted net loss per share 26,838 14,175 25,604 13,236
======= ======== ======== ========
</TABLE>
See accompanying notes
Page 4 of 27
<PAGE>
VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (37,167) $ (36,086)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation 2,706 1,570
Amortization of Goodwill 3,538 -
Amortization of deferred compensation 202 422
Purchase of in-process research and development with common stock 14,347 25,870
Changes in operating assets and liabilities:
Other receivables 1,215 (590)
Prepaid expenses and other 608 (1,772)
Deferred revenue 744 317
Accounts payable (2,236) (2,621)
Accrued liabilities (455) 273
--------- ---------
Net cash used in operating activities (16,498) (12,617)
Cash flows from investing activities
Net cash acquired in acquisition 422 11,844
Purchase of property and equipment (676) (5,312)
Deposits and other assets - (16)
Purchase of available-for-sale investments - (9,568)
Maturities of available-for-sale investments 17,237 8,735
--------- ---------
Net cash provided by investing activities 16,983 5,683
Cash flows from financing activities
Proceeds from issuance of long-term debt 404 5,847
Payments on long-term debt (2,310) (1,174)
Proceeds from issuance of common stock, net of repurchases 5,292 179
--------- ---------
Net cash provided by financing activities 3,386 4,852
Net increase (decrease) in cash and cash equivalents 3,871 (2,082)
Cash and cash equivalents, beginning of period 4,785 15,172
--------- ---------
Cash and cash equivalents, end of period $ 8,656 $ 13,090
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 597 $ 560
SCHEDULE OF NON-CASH TRANSACTIONS:
Construction in progress included in accrued liabilities (126) (346)
Tangible and intangible assets acquired for shares of common stock, net of cash
acquired and liabilities assumed 5,334 3,596
Common stock issued and options assumed in business acquisition 19,266 39,603
</TABLE>
See accompanying notes
Page 5 of 27
<PAGE>
VALENTIS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by Valentis, Inc. ("Valentis" or the "Company") in accordance
with the rules and regulations of the Securities and Exchange Commission for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in the Company's annual financial statements as
required by generally accepted accounting principles have been condensed or
omitted. The interim financial statements, in the opinion of management, reflect
all adjustments (consisting of normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended March 31, 2000 and 1999.
The balance sheet at June 30, 1999 is derived from the audited financial
statements at that date but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The results of operations for the three and nine months ended March 31, 2000 are
not necessarily indicative of the results of operations to be expected for the
fiscal year, although the Company expects to incur a substantial loss for the
year ended June 30, 2000. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended June 30,
1999, which are contained in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
On March 18, 1999, the Company completed its merger with GeneMedicine, Inc.
("GeneMedicine"). On August 27, 1999, the Company acquired all the
outstanding shares of PolyMASC Pharmaceuticals plc ("PolyMASC"). Both
transactions were accounted for under the purchase method of accounting.
The accompanying condensed consolidated financial statements reflect the
revenues and expenses of PolyMASC and GeneMedicine from their acquisition dates
and include the accounts of the Company and its wholly owned subsidiary,
PolyMASC. All significant intercompany balances and transactions have been
eliminated.
2. REVENUE RECOGNITION
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. For some
contracts, the Company is reimbursed based on the costs associated with the
number of full time equivalent employees working on each specific contract over
the term of the agreement. Research and development expenses under the
collaborative research agreements approximate or exceed the revenue recognized
under such agreements over the term of the respective agreements.
Deferred revenue results when the Company does not incur the required level of
effort during a specific period in comparison to funds received under the
respective contracts, or if additional work may be required to satisfy a
contract obligation. In addition, as a result of the GeneMedicine merger,
deferred revenue at March 31, 2000 includes an obligation related to a research
agreement with Roche Holdings Ltd. ("Roche"). Pursuant to the terms of the Roche
agreement, the Company may be obligated to conduct research and development at
its own expense in an amount not to exceed $5 million at the end of the
agreement. The Company has, therefore, deferred a portion of research funding
received from Roche under this agreement to provide for this obligation.
Milestone payments, if any, will be recognized pursuant to collaborative
agreements upon the achievement of specified milestones, such as the filing of
Investigational New Drug Applications, commencement of clinical trials or
receipt of regulatory approvals.
Page 6 of 27
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101")
which must be adopted in the quarter ended June 30, 2000. SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue in financial statements and specifically addresses revenue
recognition for non-refundable technology access fees. The Company believes that
its current revenue recognition principles comply with SAB 101 and thus the
adoption had no effect on results of operations.
3. NET LOSS PER SHARE
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" ("SFAS 128"), which requires the presentation of
basic earnings (loss) per share and diluted earnings (loss) per share, if
dilutive. Basic earnings per share is computed by dividing income or loss
applicable to common stockholders by the weighted-average number of common
shares outstanding for the period, net of certain common shares outstanding
which are subject to continued vesting and the Company's right of repurchase.
Basic earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted net loss per share has not been presented
separately as, given the Company's net loss position, the results would be
anti-dilutive.
The following have been excluded from the calculation of net loss per share
because the effect of inclusion would be antidilutive: 18,432 common shares
which are outstanding but are subject to the Company's right of repurchase which
expires ratably over 4 years; options to purchase 2,135,880 shares of common
stock at a weighted average price of $6.42 per share and warrants to purchase
24,140 shares of common stock at a weighted average exercise price of $3.88 per
share. Options and warrants will be included in the calculation of diluted
earnings per share at such time as the effect is no longer antidilutive, as
calculated using the treasury stock method. The repurchasable shares will be
included in the calculations as the repurchase rights lapse.
A reconciliation of shares used in the calculation of basic and diluted net loss
per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (8,265) $ (29,549) $ (37,167) $ (36,086)
======== ========= ========== =========
BASIC AND DILUTED
Weighted average shares of common stock outstanding 26,859 14,251 25,637 13,335
Common shares subject to repurchase (21) (76) (33) (99)
-------- --------- ---------- ---------
Weighted average shares of common stock used in computing net loss per
share 26,838 14,175 25,604 13,236
======== ========= ========== =========
Basic and diluted net loss per share $ (0.31) $ (2.09) $ (1.45) $ (2.73)
======== ========= ========== =========
</TABLE>
4. ACQUISITION OF POLYMASC PHARMACEUTICALS PLC ("POLYMASC")
On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc ("PolyMASC").
Under the terms of the acquisition agreement, each outstanding share of PolyMASC
common stock was exchanged, at a fixed exchange ratio of 0.209, for newly issued
shares of common stock of Valentis. This resulted in the issuance of
approximately 4.2 million Valentis shares, valued at about $19.3 million based
on an average Valentis stock price of $4.56 at the date the transaction was
announced. Dr. Gillian E. Francis, Chief Executive Officer of
Page 7 of 27
<PAGE>
PolyMASC, has joined the Board of Directors of Valentis and is serving as
Managing Director, PolyMASC. The Company is managing PolyMASC as a wholly
owned subsidiary of Valentis. The acquisition was accounted for as a
purchase.
The total cost of the merger was approximately $20.1 million, determined as
follows (in thousands):
<TABLE>
<S> <C>
Fair value of Valentis Common Stock
(based on the per share fair value at the date the agreement was announced) $ 19,266
Valentis transaction costs 837
----------
$ 20,103
==========
</TABLE>
Based on a valuation of tangible and intangible assets and liabilities
assumed, Valentis has allocated the total cost of the acquisition to the net
assets of PolyMASC as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets acquired $ 1,600
In-process research and development 14,347
Intangible assets - assembled workforce and goodwill 6,261
Liabilities assumed (including PolyMASC transaction costs) (2,105)
---------
$ 20,103
=========
</TABLE>
PolyMASC's research and development programs are in various stages of
preclinical development. Currently, none of the products utilizing PolyMASC's
proprietary technology has as yet entered any stage of human clinical testing or
has been approved for marketing. PolyMASC's strategy has been to develop and
commercialize its products through alliances with pharmaceutical and
biotechnology companies.
A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in $14.3 million of the purchase
price being charged to in-process research and development. The intangible
assets, consisting of assembled workforce and goodwill, were assigned a value of
$6.3 million and will be amortized over their estimated useful lives of three
years. The acquired in-process research and development was included in the
Valentis Statement of Operations for the quarter ended September 30, 1999.
The unaudited pro forma information for the Company for the nine months ended
March 31, 2000 and 1999, had the acquisition occurred at the beginning of each
fiscal year is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Nine months ended
March 31,
2000 1999
---- ----
<S> <C>
Net revenue $ 4,556 $ 2,992
Net loss $ (23,337) $ (38,152)
Net loss per share $ (0.88) $ (2.21)
========= =========
</TABLE>
Page 8 of 27
<PAGE>
The unaudited pro forma combined results for the nine months ended March 31,
2000 and 1999 exclude the effect of the write-off of acquired in-process
research and development of $14.3 million, as such amount is non-recurring. The
unaudited pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results that would have occurred
had the transaction been completed at the beginning of the period indicated, nor
is it necessarily indicative of future operating results.
5. COMPREHENSIVE INCOME (LOSS)
Following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (8,265) $ (29,549) $ (37,167) $ (36,086)
Net unrealized gain (loss) on available-for-sale securities 42 (52) 59 48
Net unrealized foreign exchange translation adjustment 28 - 72 -
-------- --------- --------- ---------
Comprehensive loss $ (8,195) $ (29,601) $ (37,036) $ (36,038)
======== ========= ========= =========
</TABLE>
The components of accumulated other comprehensive income(loss) are as follows
(in thousands):
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Unrealized gain (loss) on available for sale investments $ (51) $(109)
Foreign currency translation adjustments 72 -
----- -----
Accumulated other comprehensive income(loss) $ 21 $(109)
===== =====
</TABLE>
6. GOODWILL
Goodwill reflects the associated goodwill as of March 31, 2000 resulting from
the merger of GeneMedicine and the acquisition of PolyMASC at $6.6 million and
$5.0 million, respectively.
7. SUBSEQUENT EVENT - PRIVATE PLACEMENT
On April 14, 2000, the Company completed a private placement of 1,915,000 shares
of newly issued common stock for a total purchase price of $19.15 million to
European and US biotech investors. The securities sold in this placement were
not registered under the Securities Act of 1933. The Company agreed to file a
resale registration statement on Form S-3 within 45 days after the closing of
the transaction for purposes of registering the shares of common stock acquired
by these investors.
Page 9 of 27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999, FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
OVERVIEW
The Company develops proprietary technologies and applies its preclinical and
early clinical development expertise to create novel therapeutics. The Company's
core technologies include multiple gene delivery and gene expression systems and
PEGylation technologies designed to improve the safety, efficacy and dosing
characteristics of genes, proteins, peptides, peptidomimetics (peptide-like
small molecules), antibodies and replicating and non-replicating viruses. These
technologies are covered by a broad patent portfolio that includes issued U.S.
and European claims. This expanded portfolio of delivery technologies allows
Valentis to maintain its focus on creating improved versions of currently
marketed products as well as solving safety, efficacy and compliance issues with
biologics in development. Valentis' commercial strategy is to enter into
corporate collaborations for full-scale clinical development and marketing and
sales of products. Valentis itself, or through its PolyMASC subsidiary,
currently has corporate collaborations with:
- Roche Holdings Ltd. ("Roche") for cancer immunotherapeutics,
- Eli Lilly & Co. ("Lilly") to develop treatments for breast and
ovarian cancer using the BRCA1 gene,
- Glaxo Wellcome plc ("Glaxo Wellcome") to develop a treatment
for cystic fibrosis using the CFTR gene,
- Boehringer Ingelheim ("BI") to develop treatments for
rheumatoid arthritis,
- Heska Corporation ("Heska") for the development of gene
medicines for animal health,
- Transkaryotic Therapies Inc. for PEGylation of certain proteins,
- Onyx Pharmaceuticals Inc. for a PEGylated virus-based cancer
therapeutic,
- Bayer Corporation for a PEGylated Factor VIII, and
- DSM Biologics and Qiagen N.V. for plasmid manufacturing.
To date, substantially all revenue has been generated by collaborative research
and development agreements from corporate partners. In the quarter ended March
31, 2000 the Company, for the first time, recorded royalties from product sales
resulting from a license agreement with Invitrogen. These royalties were less
than $1,000 for the quarter. Under the terms of its corporate collaborations,
the Company generally receives research and development funding on a quarterly
basis in advance of associated research and development costs. The Company
expects that future revenue will be derived from research and development
funding and milestone payments under collaboration agreements and in the
long-term from royalties on product sales.
The Company is conducting operations in California, Texas and London. The
Company has incurred significant losses since inception and expects to incur
substantial losses for the foreseeable future, primarily due to the expansion of
its research and development programs and because the Company may not generate
significant revenue from the sale of products in the foreseeable future, if at
all. The Company expects that operating results will fluctuate from quarter to
quarter and that such fluctuations may be substantial. The Company expects to
increase both research and administrative expenditures in future periods. As of
March 31, 2000, the Company's accumulated deficit was approximately $110.4
million.
Page 10 of 27
<PAGE>
BUSINESS ACQUISITIONS
On August 27, 1999, Valentis acquired PolyMASC Pharmaceuticals plc ("PolyMASC").
Under the terms of the acquisition agreement, each outstanding ordinary share of
PolyMASC was exchanged, at a fixed exchange ratio of 0.209, for newly issued
shares of common stock of Valentis. This resulted in the issuance of
approximately 4.2 million Valentis shares valued at about $19.3 million based on
an average Valentis stock price of $4.56 at the date the transaction was
announced. The purchase price also included approximately $837,000 of
transaction costs, for an aggregate purchase price of $20.1 million. Dr. Gillian
E. Francis, Chief Executive Officer of PolyMASC, has joined the Board of
Directors of Valentis and is serving as Managing Director of PolyMASC. The
Company is managing PolyMASC as a wholly owned subsidiary of Valentis. The
acquisition was accounted for as a purchase.
PolyMASC's research and development programs are in various stages of
preclinical development. Currently, none of the products utilizing PolyMASC's
proprietary technology has as yet entered any stage of human clinical testing or
has been approved for marketing. PolyMASC's strategy has been to develop and
commercialize its products through alliances with pharmaceutical and
biotechnology companies.
A valuation of the purchased assets was undertaken to assist the Company in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, the Company
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility, and the risks related to the viability of and potential changes to
future target markets. The analysis resulted in $14.3 million of the purchase
price being charged to in-process research and development (see detailed
discussion under "Acquisition of GeneMedicine Research and Development Programs"
below). The intangible assets, consisting of assembled workforce and goodwill,
were assigned a value of $6.3 million and will be amortized over their estimated
useful lives of three years. The acquired in-process research and development
was included in the Valentis Condensed Consolidated Statements of Operations for
the quarter ended September 30, 1999.
With the acquisition of London-based PolyMASC, Valentis expanded its delivery
technologies and has a more diversified portfolio of products in clinical and
preclinical development. The acquisition broadened Valentis' intellectual
property portfolio in biologics delivery, creating what it believes is the first
company offering a broad array of technologies and intellectual property in
biologics delivery. PolyMASC will continue to focus primarily on research and
preclinical development of PEGylation technologies and products. PEGylation is
an established technology that involves the attachment of the polymer
polyethyleneglycol ("PEG") to therapeutics to alter their pharmacokinetics
(distribution in the body, metabolism and excretion). The alteration of the
pharmacokinetics of biologics due to PEGylation may lead to improved dosing
intervals and may also have beneficial effects on safety and efficacy.
On March 18, 1999, Megabios Corp. completed its merger with GeneMedicine, Inc.
("GeneMedicine"). On April 29, 1999, the combined company was renamed Valentis,
Inc. (the "Company"). Each outstanding share of GeneMedicine common stock was
converted into 0.571 of a share of the common stock of the Company. The merger
resulted in the issuance of approximately 9.1 million shares of the Company's
common stock, valued at $38.7 million. The purchase price also included
approximately $850,000 related to outstanding GeneMedicine stock options and
outstanding warrants assumed by the Company and $1.7 million of transaction
costs, for an aggregate purchase price of $41.3 million.
Page 11 of 27
<PAGE>
The merger transaction was accounted for as a purchase. A write-off of $25.9
million for in-process research and development acquired from GeneMedicine was
included in the Company's Condensed Consolidated Statement of Operations (see
detailed discussion under "Acquisition of GeneMedicine Research and Development
Programs" below). The intangible assets acquired are being amortized over their
estimated useful lives of 3 years.
RESULTS OF OPERATIONS
The Company's revenue for the three months ended March 31, 2000 totaled
approximately $1.1 million compared to $790,000 for the corresponding period of
1999. Revenue for the nine months ended March 31, 2000 totaled approximately
$4.6 million compared to $2.2 million for the corresponding period of 1999. In
the quarter ended March 31, 2000 the Company, for the first time, recorded
royalties from product sales resulting from a license agreement with Invitrogen.
These royalties were less than $1,000 for the quarter.
The 2000 and 1999 revenue contributions attributable to milestone achievements
and for collaborative research and development performed under the Company's
corporate collaborations, and grant revenue are (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Roche Holdings, Ltd. $ 474 $ - $3,224 $ -
Boehringer Ingelheim 160 - 373 -
Eli Lilly 155 540 262 1,926
DSM Biologics - 250 - 250
Other 176 - 442 -
------ ---- ------ ------
965 790 4,301 2,176
Grant Revenue 86 - 252 -
------ ---- ------ ------
Total Revenue $1,051 $790 $4,553 $2,176
====== ==== ====== ======
</TABLE>
Research and development expenses increased to $6.3 million and $18.9 million
for the quarter and nine months ended March 31, 2000, respectively, from $3.5
million and $10.3 million in the corresponding periods of 1999. The increases in
2000 were primarily attributable to the addition of staff, facilities and
projects resulting from the acquisition of PolyMASC in August 1999. The Company
expects research and development expenses to increase as the Company continues
to expand its independent and collaborative research and development programs.
General and administrative expenses for the quarter and nine months ended March
31, 2000 increased to $1.7 million and $5.4 million, respectively, from $1.3
million and $3.4 million in the corresponding periods of 1999. The increases in
2000 compared to 1999 were primarily due to the addition of staff, facilities
and projects resulting from the acquisition of PolyMASC in August 1999. The
Company expects general and administrative expenses to increase due to business
development activities and to support expanded research and development
activities.
Interest income (expense), net was $47,000 for the quarter ended March 31, 2000
compared to $318,000 for the corresponding quarter of the prior year. For the
nine months ended March 31, 2000, interest income (expense), net was $539,000
compared to $1.3 million for the corresponding period of the prior year. The
decrease in interest income (expense), net resulted primarily from increased
interest expenses on outstanding balances on the Company's
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<PAGE>
equipment financing lines of credit and a decrease in interest income
resulting from lower average cash, cash equivalent and short-term investment
balances.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had $25.8 million in cash, cash equivalents
and investments compared to $39.1 million at June 30, 1999. Net cash used in the
Company's operations for the nine months ended March 31, 2000 was $16.5 million
compared to $12.6 million in the corresponding period of 1999. Cash was used
primarily to fund increasing levels of research and development and general and
administrative activities. The Company's capital expenditures were $676,000 for
the nine months ended March 31, 2000 compared to $5.3 million used in the
corresponding period of 1999.
In May 1996, the Company entered into an equipment financing agreement for up to
$2.7 million with a financing company. The Company utilized the entire $2.7
million to finance equipment purchases under this agreement structured as loans.
The equipment loans are being repaid over 48 months at interest rates ranging
from 15.2% to 16.2% and are secured by the related equipment. As of March 31,
2000, the outstanding balance under this financing agreement was $1.2 million.
In June 1998, the Company established a line of credit for $8.0 million with a
commercial bank, which was subsequently fully utilized. In accordance with the
terms of the agreement, the entire balance was converted into term loans at
interest rates ranging from 8.25% to 9.0% due in equal monthly installments. The
loans are secured by tangible personal property, other than the assets securing
the equipment financing, accounts receivable and funds on deposit. As a
condition of the credit line, the Company must maintain a minimum cash and
short-term investments balance of not less than the greater of the prior two
quarters net cash usage or 90% of the total principal drawn under the line of
credit. As of March 31, 2000, the outstanding balance under this financing
agreement was $5.1 million.
In October 1998, the Company entered into an equipment financing agreement for
up to $2.5 million with a financing company. The Company financed $366,000 in
equipment purchases under this agreement structured as loans. The equipment
loans are being repaid over 43 months at interest rates 10.10% and are secured
by the related equipment. As of March 31, 2000, the outstanding balance under
this financing agreement was $332,000.
In April 2000, Valentis completed a $19.15 million private placement of
1,915,000 shares of newly issued common stock at $10.00 per share with leading
international and domestic biotechnology investors.
The Company anticipates that its cash and cash equivalents, committed funding
from existing corporate collaborations and projected interest income, will
enable the Company to maintain its current and planned operations at least
through December 2001. However, the Company may require additional funding prior
to such time. The Company's future capital requirements will depend on many
factors, including scientific progress in its research and development programs,
the size and complexity of such programs, the scope and results of preclinical
studies and clinical trials, the ability of the Company to establish and
maintain corporate collaborations, the time and costs involved in obtaining
regulatory approvals, the time and costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
cost of manufacturing preclinical and clinical materials and other factors not
within the Company's control. The Company is seeking additional collaborative
agreements with corporate partners and may seek additional funding through
public or private equity or debt financing. The Company may not be able to enter
into any such agreements, however, or if entered into, any such agreements may
not reduce the Company's funding requirements. The Company expects that
additional equity or debt financing may be required to fund its operations.
Additional financing to meet the Company's funding requirements may not be
available on acceptable terms or at all.
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<PAGE>
If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require the
Company to delay, scale back or eliminate some or all of its research or
development programs or to relinquish greater or all rights to products at an
earlier stage of development or on less favorable terms than the Company would
otherwise seek to obtain, which could materially adversely affect the Company's
business, financial condition and results of operations.
ACQUISITION OF GENEMEDICINE RESEARCH AND DEVELOPMENT PROGRAMS
There are seven primary GeneMedicine research and development programs that the
Company acquired in March 1999. Prior to the merger of GeneMedicine with
Megabios in March 1999, over the previous five years, GeneMedicine incurred
approximately $50 million of research and development expenses in the
development of its current research and development programs. Costs to complete
these projects could aggregate to approximately $65 million over the next five
to seven years.
In determining its research and development priorities, the Company has decided
to delay additional work on three of the programs acquired in the merger with
GeneMedicine. Work on any of the growth factor gene medicines, pulmonary gene
medicines and the nucleic acid programs will not be pursued unless or until a
corporate partner is found to provide funding for further development.
The Company presently anticipates that gene medicines (which utilize its
proprietary development-stage technologies) will complete development beginning
at various times beginning in 2005 through 2008. If such gene medicines are
successfully completed, the Company will receive a royalty on the product sales.
The nature of the efforts required for developing the acquired in-process
research and development into technologically feasible and commercially viable
products principally relate to the successful performance of additional
preclinical studies and clinical trials. Though the Company expects that some of
the acquired in-process technology will be successfully developed, there can be
no assurance that commercial or technical viability of these products will be
achieved. While the expectations and promise of gene therapy are great, clinical
efficacy has not yet been demonstrated. Many approaches to gene therapy are
being pursued by pharmaceutical and biotechnology companies, but there are
currently no marketed gene therapy products and none are expected for the next
several years. This development risk was considered in determining the value of
the in-process research and development.
ACQUISITION OF POLYMASC RESEARCH AND DEVELOPMENT PROGRAM
PEGylation is the primary PolyMASC research and development program that the
Company acquired in August 1999. The Company's management is primarily
responsible for estimating the fair value of the purchased in-process research
and development. The program has been valued based on a discounted probable
future cash flow analysis using a discount rate of 40%, which management
believes adequately reflects the substantial risk of biologics delivery research
and development. In the valuation model, it is assumed that for product
candidates based on PolyMASC's technology, preclinical studies and clinical
trials are successfully completed, regulatory approval to market the product
candidates is obtained, a marketing partner is secured and the Company is able
to manufacture the product in commercial quantities. Each of these activities is
subject to significant risks and uncertainties and no product utilizing the
technology has been successfully developed to date. The PEGylation technology
that the Company acquired was valued at $14.3 million. The Company currently has
corporate collaborations with Onyx Pharmaceuticals, Transkaryotic Technologies
and Bayer Pharmaceuticals under which it is developing product candidates using
its PEGylation technology.
Before a product can be successfully marketed, the Company's corporate partners
must fund the completion of preclinical studies, clinical studies and, if
successfully completed, the market introduction of the new PEGylated therapies.
Product efficacy and dose responsiveness must be proven in Phase II and Phase
III human clinical
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<PAGE>
trials and FDA approval is required before market introduction. The Company
currently estimates that clinical development activities will not be
completed and revenues will not begin to accrue to the Company for the next
several years. Management estimates that the remaining research and
development efforts, offset by estimated revenue generated from potential
corporate collaborators, will total more than $8 million over the next six
years. This amount could vary significantly depending on the success of
preclinical development efforts, clinical trial results, the Company's
success in attracting and retaining corporate collaborators and the ability
of the Company's collaborators to successfully manufacture and market any
resulting products.
FINANCIAL MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.
The Company maintains a strict investment policy that ensures the safety and
preservation of its invested funds by limiting default risk, market risk, and
reinvestment risk. The Company's investments consist primarily of commercial
paper, medium term notes, U.S. Treasury notes and obligations of U.S. Government
agencies and corporate bonds. All investment securities held mature in 2000. The
table below presents notional amounts and related weighted-average interest
rates for the Company's investment portfolio and long-term debt obligations (in
thousands, except percentages).
<TABLE>
<CAPTION>
2000 Total
----------------- -----------------
<S> <C> <C>
Cash equivalents
Fixed rate....................................................................... $5,174 $5,174
Average rate..................................................................... 5.87% 5.87%
Short-term investments
Fixed rate....................................................................... $17,174 $17,174
Average rate..................................................................... 5.23% 5.23%
Total investment securities......................................................... $22,348 $22,348
Average rate........................................................................ 5.34% 5.34%
</TABLE>
The Company has a financing agreement with a commercial bank that matures in
2002. The outstanding balance as of March 31, 2000 was approximately $5.1
million at the bank's prime rate plus .5%. Also, the company has entered into
equipment financing agreements with financing companies that mature in 2002 and
2003 at fixed interest rates ranging from 10.1% to 16.2%.
RISK FACTORS
DEVELOPMENT OF OUR PRODUCTS WILL TAKE SEVERAL MORE YEARS AND WILL REQUIRE
REGULATORY APPROVAL BEFORE THEY CAN BE SOLD
Because substantially all of our potential products currently are in
research, preclinical development, or the early stages of clinical testing,
revenues from sales of any products will not occur for at least the next several
years, if at all. We cannot be certain that any of our products will be safe and
effective or that we will obtain regulatory approvals. In addition, any products
that we develop may not be economical to manufacture on a commercial scale. Even
if we develop a product that becomes available for commercial sale, we cannot be
certain that consumers will accept the product.
If we cannot satisfy existing clinical and regulatory approval
requirements, we or one of our partners may not be able to market our products.
We may not obtain regulatory approval for the commercial sale of any of our
products, or be able to demonstrate that a potential product is safe and
effective for its intended use. We cannot
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<PAGE>
be certain that we or our corporate partners will be permitted to undertake
clinical testing of our potential products and, if we are successful in
initiating clinical trials, we may experience delays in conducting them.
While we have demonstrated some evidence that our gene delivery systems
have utility in preclinical studies, these results do not mean that the
resulting products will be safe and effective in humans. Our gene delivery
systems may have undesirable and unintended side effects or other
characteristics that may prevent or limit their use.
Gene-based therapies and enhanced delivery of pharmaceuticals based on
biologics are new and rapidly evolving technologies that are expected to undergo
significant technological changes in the future. Many other companies are
seeking to identify therapeutic genes and understand their function in the
development and progression of various diseases. However, only limited clinical
data are available regarding the safety and efficacy of gene-based therapeutics.
We are not aware of any gene-based therapeutic that has received marketing
approval from the United States Food and Drug Administration, or FDA, or foreign
regulatory authorities. As a result, clinical trials relating to gene-based
therapeutics may take longer to complete than clinical trials involving more
traditional pharmaceuticals.
We do not yet have products in the commercial markets. All of our
potential products are in preclinical development or in the early stages of
clinical testing. We cannot apply for regulatory approval of our potential
products until we have performed additional research and development and
testing. Our clinical trials may not demonstrate the safety and efficacy of
our potential products, and we may encounter unacceptable side effects or
other problems in the clinical trials. Should this occur, we may have to
delay or discontinue development of the potential product that causes the
problem. After a successful clinical trial, we cannot market products in the
United States until we receive regulatory approval. If we are able to gain
regulatory approval of our products after successful clinical trials and then
commercialize and sell those products, we may be unable to manufacture enough
products to maintain our business or secure additional financing to fund our
operations.
WE HAVE A HISTORY OF LASSES AND MAY NEVER BE PROFITABLE
We may never generate profits, and if we do become profitable, we may
be unable to sustain or increase profitability on a quarterly or annual basis.
As a result, the trading price of our stock could decline and you could lose all
or part of your investment.
Since our inception, we have engaged in research and development
activities. We have generated only small amounts of revenue and have experienced
significant operating losses since we began business. As of June 30, 1999, we
have incurred losses totaling $73.3 million. The process of developing our
products will require significant additional research and development,
preclinical testing, clinical trials and regulatory approvals. These activities,
together with general and administrative expenses, are expected to result in
operating losses for the foreseeable future.
WE MUST BE ABLE TO CONTINUE TO SECURE ADDITIONAL FINANCING
Developing and commercializing our potential products will require
substantial additional financial resources. Because we cannot expect internally
generated cash flow to fund development and commercialization of our products,
we will look to outside sources for funding. These sources could involve one or
more of the following types of transactions:
- technology partnerships;
- technology sales;
- technology licenses;
- issuing debt; or
- sales of common or preferred stock.
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<PAGE>
Our future capital requirements will depend on many factors, including:
- scientific progress in its research and development programs;
- size and complexity of such programs;
- scope and results of preclinical studies and clinical trials;
- ability to establish and maintain corporate collaborations;
- time and costs involved in obtaining regulatory approvals;
- time and costs involved in filing, prosecuting and enforcing patent
claims;
- competing technological and market developments; and
- the cost of manufacturing material for preclinical, clinical and
commercial purposes.
We have financed our operations primarily through the sale of equity
securities and through corporate collaborations. We have not generated
significant royalty revenues from product sales, and we do not expect to
receive significant revenue from royalties for the foreseeable future, if
ever. We expect that our existing resources will enable us to maintain our
operations through at least the calendar year ending December 31, 2001.
However, we may require additional funding prior to such time.
We cannot be certain that additional financing to meet our funding
requirements will be available. Even if financing is available, the terms may
not be attractive. If we cannot obtain additional financing when needed or on
acceptable terms, we will be unable to fund continuing operations. In addition,
if we raise additional funds by issuing equity securities, our shareholders will
likely experience significant dilution of their ownership interest.
THERE IS INTENSE COMPETITION IN THE BIOLOGICS-BASED THERAPEUTICS MARKET
The pharmaceutical and biotechnology industries are highly competitive.
The intense competition and rapid technological change in our market may result
in pricing pressures and failure of our products to achieve market acceptance.
Valentis is aware of several pharmaceutical and biotechnology companies
that are pursuing gene-based therapeutics or are incorporating PEGylated
technologies into new pharmaceuticals. Many of these companies are addressing
diseases that have been targeted by our corporate partners and us. We are also
aware that some of our corporate partners are developing gene-based and
PEGylated therapeutics with one or more of our competitors. We also face
competition from companies developing cell-based therapies and from companies
using more traditional approaches to treating human diseases. Most of our
competitors have substantially more experience and financial and infrastructure
resources than we do in the following areas:
- research and development;
- clinical trials;
- obtaining Food and Drug Administration and other regulatory
approvals;
- manufacturing, marketing and distribution.
As competitors develop their technologies, they may develop proprietary
positions in a particular aspect of biologics delivery that could prevent us
from developing our products. Consequently, our competitors may be able to
commercialize new products more rapidly than we do, or manufacture and market
competitive products more successfully than we do. This could result in pricing
pressures or the failure of our products to achieve market acceptance.
Gene therapy and enhanced delivery of biologics are new and rapidly
evolving fields and are expected to continue to undergo significant and rapid
technological change. Rapid technological development by our
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<PAGE>
competitors could result in our actual and proposed technologies, products or
processes losing market share or becoming obsolete.
In addition, we face intense competition from other companies for
corporate collaborations, for establishing relationships with academic and
research institutions and for licenses to proprietary technology. Our
competitors may develop safer, more effective or less costly biologic delivery
systems, gene-based therapeutics or chemical-based therapies. In addition,
competitors may achieve superior patent protection or obtain regulatory approval
or product commercialization earlier than we can.
WE MUST ATTRACT AND RETAIN CORPORATE PARTNERS
Our business strategy is to attract business partners to fund or
conduct research and development, preclinical studies, clinical trials,
manufacturing, marketing and sales of our products. While we believe that our
partners will be motivated to develop, market and distribute potential products
based on our technologies, they may not commit sufficient resources to
commercializing our products on a timely basis. They may also pursue the
development or marketing of competing products. If our business partners do not
successfully market and distribute our products and we are unable to develop
sufficient marketing and distribution capabilities on our own, our business will
fail.
WE MUST ATTRACT AND RETAIN QUALIFIED EMPLOYEES AND CONSULTANTS
Our success will depend on our ability to retain our executive officers
and scientific staff to develop our potential products and formulate our
research and development strategy. We have programs in place to retain
personnel, including programs to create a positive work environment and
competitive compensation packages. Because competition for employees in our
field is intense, however, we may be unable to retain our existing personnel or
attract additional qualified employees. Our success also depends on the
continued availability of outside scientific collaborators to perform research
and develop processes to advance and augment our internal research efforts.
Competition for collaborators is intense. If we do not attract and retain
qualified personnel and scientific collaborators, and if we experience turnover
or difficulties recruiting new employees, our research and development programs
could be delayed and we could experience difficulties in generating sufficient
revenue to maintain our business.
WE MUST OBTAIN RIGHTS TO PROPRIETARY GENES, PROTEINS OR OTHER TECHNOLOGIES
We, and our corporate partners, are investigating the use of gene
sequences and proteins in our products. A number of these gene sequences and
proteins have been, or may be, patented by others. As a result, we may be
required to obtain licenses to those gene sequences, proteins or other
technologies. In addition, some of the products based on our gene or PEGylation
delivery systems will require the use of multiple proprietary technologies. We
may not be able to obtain a license to those technologies at reasonable terms,
if at all. As a consequence, we might be prohibited from developing potential
products or we might have to make cumulative royalty payments to several
companies. These cumulative royalties would reduce amounts paid to us and could
be make the costs of our products too expensive to introduce.
WE MAY BE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS
We may be unable to adequately protect our proprietary rights, which
may limit our ability to compete effectively. Our success will depend to a
significant degree on our ability to:
- obtain patents and licenses to patent rights;
- preserve trade secrets; and
- operate without infringing on the proprietary rights of others.
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<PAGE>
We own or have licenses to patents on a number of genes, processes,
practices and techniques critical to our present and potential products. If
we fail to obtain and maintain patent protection for our technologies, our
competitors may market competing products that threaten our market position.
The failure of our licensors to obtain and maintain patent protection for
technology they license to us could similarly harm our business. Patent
positions in the field of biotechnology are highly uncertain and involve
complex legal, scientific and factual questions. Our patent applications may
not result in issued patents. Even if we secure a patent, the patent may not
afford adequate protection against our competitors. Intellectual property
claims and litigation could subject us to significant liability for damages
and invalidation of our patent rights.
We also rely on unpatented trade secret technologies. Because these
technologies do not benefit from the protection of patents, we may be unable
to meaningfully protect these trade secret technologies from unauthorized use
or misappropriation by a third party.
As the biotechnology industry expands, the risks increase that other
companies may claim that our processes and potential products infringe on their
patents. Defending these claims would be costly and would likely divert
management's attention and resources away from our operations. If we infringe on
another company's patented processes or technology, we may have to pay damages
or obtain a license in order to continue manufacturing or marketing the affected
product or using the affected process. We may be unable to obtain a license on
acceptable terms.
OUR PRODUCTS MUST SATISFY GOVERNMENT REGULATIONS
We may not receive approval from regulatory authorities to market any
of our products. Also, delays or unexpected costs in obtaining approval of our
products or complying with governmental regulatory requirements could decrease
our ability to sell products, generate revenue and would make funding our
operations more difficult.
Prior to marketing any drug or biological product in the U.S., a
potential product must undergo rigorous preclinical studies and clinical trials.
In addition, the product must receive regulatory approval from the FDA.
Satisfaction of the FDA requirements typically takes several years or more and
costs a substantial amount of money. We cannot be certain that we will obtain
regulatory approval even if we devote substantial resources and time. The
regulatory process in the biologics delivery industry is costly, time-consuming
and subject to unpredictable delays. Accordingly, we cannot predict with any
certainty how long it will take or how much it will cost to obtain regulatory
approvals for clinical trials or for manufacturing or marketing our potential
products. Delays in bringing a potential product to market or unexpected costs
in obtaining regulatory approvals could decrease our ability to generate revenue
and make it more difficult to obtain additional financing necessary to fund our
operations.
In addition, drug manufacturing facilities in the U.S. must comply with
the FDA's good manufacturing process regulations. Such facilities are subject to
periodic inspection by the FDA and state authorities. Manufacturers of biologics
also must comply with the FDA's general biological product standards and also
may be subject to state regulation. While we anticipate that we will be able to
manufacture product that meets these requirements, we may be unable to attain or
maintain compliance with current or future Good Manufacturing Practices
requirements. If we discover previously unknown problems after we receive
regulatory approval of a potential product or fail to comply with applicable
regulatory requirements, we may suffer restrictions on our ability to market the
product, including mandatory withdrawal of the product from the market. This, or
an unexpected increase in the cost of compliance, could decrease our ability to
generate revenue or become profitable.
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<PAGE>
WE MUST OBTAIN FOREIGN REGULATORY APPROVALS TO MAKE AND SELL PRODUCTS IN
FOREIGN COUNTRIES
We cannot be certain that we will obtain regulatory approvals in other
countries. In order to market our products outside the US, we, and our corporate
partners, must comply with numerous and varying regulatory requirements of other
countries regarding safety and quality. The approval procedures vary among
countries and can involve additional testing. The time required obtaining
approval in other countries might differ from that required obtaining FDA
approval. The regulatory approval process in other countries involves similar
risks to those associated with obtaining FDA approval set forth above. Approval
by the FDA does not ensure approval by the regulatory authorities of any other
country.
OUR PRODUCTS MUST BE ACCEPTED BY PHYSICIANS AND INSURERS
Concerns have arisen regarding the potential safety and efficacy of
gene-based therapeutics using viral delivery systems. While our gene delivery
systems do not contain viruses, these concerns could negatively affect
physicians' and health care payers' evaluations of our products. Physicians
and health care payers could conclude that our products or technologies are
not safe and effective. Our success is dependent on commercial acceptance of
our products. We believe that recommendations by physicians and health care
payers will be essential for commercial acceptance of our products. If
products developed the Company and our corporate partners are not
commercially accepted by patients, physicians or third-party payers, sales
would be adversely affected.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY IMPACT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF OUR POTENTIAL PRODUCTS
The recent death of a patient undergoing a viral-based gene therapy has
been widely publicized. This death and other adverse events in the field of gene
therapy that may occur in the future could result in greater governmental
regulation of our potential products and potential regulatory delays relating to
the testing or approval of our potential products. For example, as a result of
this death, the Recombinant DNA Advisory Committee of the National Institutes of
Health may become more active in reviewing the clinical trials or proposed
clinical trials of all companies involved in gene therapy. It is uncertain what
effect this increased scrutiny will have on our product development efforts or
clinical trials.
The commercial success of our potential products will depend in part on
public acceptance of the use of gene therapy for the prevention or treatment of
human diseases. Public attitudes may be influenced by claims that gene therapy
is unsafe, and consequently our products may not gain the acceptance of the
public or the medical community. Negative public reaction to gene therapy in
general could result in greater government regulation and stricter labeling
requirements of gene therapy products, including any of our products, and could
cause a decrease in the demand for products we may develop.
OUR PRODUCTS MUST OBTAIN ADEQUATE REIMBURSEMENT
Even if we and our corporate partners succeed in bringing products to
market, we cannot be certain that reimbursement will be available. Sales volume
and price of any of our potential products will depend, in part, on the
availability of third-party reimbursement for the cost of such products and
related treatments. Reimbursement is generally provided by government health
administration authorities, private health insurers and other organizations.
Third-party payers are increasingly challenging the price of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. Even if reimbursement is available, payers'
reimbursement policies may adversely affect our corporate partners' ability to
sell such products on a profitable basis. If these corporate partners are unable
to profitably sell our products, our royalty revenue will be reduced.
THE SUCCESS OF OUR POTENTIAL PRODUCTS IN ANIMAL MODELS DOES NOT GUARANTEE THAT
THESE RESULTS WILL BE
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<PAGE>
REPLICATED IN HUMANS
Even though our product candidates have shown successful results in
animal models, animals are different than humans and these results may not be
replicated in our clinical trials with humans. In addition, human clinical
results could be different from our expectations following our preclinical
studies with large animals. Consequently, you should not rely on the results in
our animal models as being predictive of the results that we will see in our
clinical trials with humans.
WE HAVE LIMITED EXPERIENCE IN CONDUCTING CLINICAL TRIALS WHICH MAY CAUSE DELAYS
IN RECEIVING REGULATORY APPROVAL OF OUR POTENTIAL PRODUCTS
Clinical trials must meet FDA regulatory requirements. We have limited
experience in conducting the preclinical studies and clinical trials necessary
to obtain FDA regulatory approval. Consequently, we may encounter problems in
clinical trials that may cause us, or the FDA, to delay, suspend or terminate
these trials. Problems we may encounter include the chance that we may not be
able to conduct clinical trials at preferred sites, obtain sufficient test
subjects or begin or successfully complete clinical trials in a timely fashion,
if at all. Furthermore, the FDA may suspend clinical trials at any time if it
believes the subjects participating in trials are being exposed to unacceptable
health risks or if it finds deficiencies in the clinical trial process or
conduct of the investigation.
Failure to recruit patients could delay or prevent clinical trials of
our potential products, which could cause a delay or inability to introduce
products to market and a resulting decrease in our ability to generate revenue.
The timing of our clinical trials depends on the speed at which we can recruit
patients to participate in testing our products. Delays in recruiting or
enrolling patients to test our products could result in increased costs, delays
in advancing our product development, delays in proving the usefulness of our
technology or termination of the clinical trials altogether. If we are unable to
introduce potential products to market after successful clinical trials on a
timely basis, our ability to generate revenue may decrease and we may be unable
to secure additional financing.
THE RESULTS OF OUR EARLY CLINICAL TRIALS ARE BASED ON A SMALL NUMBER OF PATIENTS
OVER A SHORT PERIOD OF TIME AND OUR SUCCESS MAY NOT BE INDICATIVE OF RESULTS IN
A LARGE NUMBER OF PATIENTS OR HAVE LASTING EFFECTS
Results in early phases of clinical testing are based upon limited
numbers of patients. Actual results with more data points may show less
favorable results. In addition, we do not yet know if these early results will
have a lasting effect. If a larger population of patients does not experience
similar results, or if these results do not have a lasting effect, our product
candidates may not receive approval from the FDA. In addition, any report of
clinical trial results that are below the expectations of financial analysts or
investors would most likely cause our stock price to drop dramatically.
WE MUST DEMONSTRATE LARGE SCALE MANUFACTURING CAPABILITIES
Our limited manufacturing experience may compromise our ability to
successfully introduce our potential products.
Although we entered into a strategic collaboration with DSM Biologics
and Qiagen N.V. for manufacturing and supplying plasmid DNA to the gene therapy
industry, neither DSM nor any third party has successfully manufactured plasmid
DNA on a large-scale commercial basis. The collaboration has the potential to
create the first manufacturing facilities that can produce high-quality,
ultra-pure material for plasmid-based
Page 21 of 27
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therapeutics on every scale, from preclinical toxicology studies to
commercial products. DSM will have full responsibility for manufacturing
material to be marketed to any company or institution working in the field of
gene therapy. We will depend on DSM for commercial-scale manufacturing of our
products. DSM may be unable to develop adequate manufacturing capabilities
for commercial-scale quantities of gene-based therapeutic products. If DSM or
third parties are unable to establish and maintain large-scale manufacturing
capabilities, we will be unable to introduce sufficient product to sustain
our business.
DELAWARE LAW AND OUR CHARTER COULD MAKE THE ACQUISITION OF OUR COMPANY BY
ANOTHER COMPANY MORE DIFFICULT
We are incorporated in the State of Delaware. Provisions of Delaware
law applicable to our company could delay a merger, tender offer or proxy
contest or make such a transaction more difficult. State laws prohibit a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless a number of conditions are met. In
addition, our Board of Directors may issue shares of preferred stock without
Valentis stockholder approval. The rights of our common stockholders may be
decreased by the rights of any future preferred stockholders. In addition, we
have:
- classified board of directors;
- no right of stockholders to act by written consent without a
meeting;
- advance stockholder notice required to nominate directors and
raise matters at the annual stockholders meeting;
- no cumulative voting in the election of directors; and
- removal of directors only for cause and with a two-thirds vote
of the issued Valentis Common Stock.
These provisions could delay, defer or prevent a change in control of
our company or limit the price that investors might be willing to pay in the
future for shares of our Common Stock.
OUR INSURANCE MAY NOT BE ADEQUATE
The costs of product liability claims and product recalls could exceed
the amount of our insurance, which could significantly harm our results of
operations or our reputation and result in a decline in the value of our stock.
Our business activities expose us to the risk of liability claims or
product recalls and any adverse publicity that might result from a liability
claim against us. We currently have only limited amounts of product liability
insurance, and the amounts of claims against us may exceed our insurance
coverage. Product liability insurance is expensive and may not continue to be
available on acceptable terms. A product liability claim not covered by
insurance or in excess of our insurance or a product recall could significantly
harm our financial results or our reputation. Either of these could result in a
decrease in our stock price, and you could lose all or part of your investment.
Page 22 of 27
<PAGE>
THERE ARE RISKS ASSOCIATED WITH ACQUIRING OTHER COMPANIES
Part of the Company's strategy is to grow through mergers and
acquisitions of products, companies and businesses, and we intend in the
future to pursue additional acquisitions of complementary product lines,
technologies and businesses. We may have to issue debt or equity securities
to pay for future acquisitions, which could be dilutive to existing
shareholders. We have also incurred and may continue to incur certain
liabilities or other expenses in connection with acquisitions, which have and
could continue to materially adversely affect our business, financial
condition and results of operations. Although we believe we has accounted for
our acquisitions properly, the U.S. Securities and Exchange Commission, or
the SEC, has recently been reviewing more closely the accounting for
acquisitions by companies, particularly in the area of "in-process" research
and development costs. If we are required by the SEC to restate any charge
that we recognized in an acquisition so far, that could result in a lesser
charge to income and increased amortization expense, which could also have a
material adverse effect on our business, financial condition and results of
operations. In addition, mergers and acquisitions involve numerous other
risks, including:
- difficulties assimilating the operations, personnel, technologies
and products of the acquired companies;
- diversion of management's attention from other business concerns;
- the potential loss of key employees of the acquired companies.
For these reasons, we cannot be certain what effect existing or future
acquisitions may have on our business, financial condition and results of
operations.
WE MUST MANAGE A COMPANY IN A FOREIGN COUNTRY
The acquisition of PolyMASC in August 1999 continues to involve the
integration of two companies that previously operated independently. The
difficulties are exacerbated by the fact that the two companies are located at
three different sites on two different continents separated by economic,
governmental and cultural differences. We have no prior experience integrating a
European operation. Difficulties in the integration process may include:
- diversion of management from the business of the combined company;
- potential incompatibility of business cultures;
- problems associated with integration of management information and
reporting systems;
- potential inability to coordinate research and development efforts
successfully; and
- operating the combined company at three different sites in
California, Texas and England.
WE USE HAZARDOUS MATERIALS
Our research and development activities involve the controlled use of
hazardous materials. Although we believe that our safety procedures for handling
and disposing of these materials comply with applicable laws and regulations, we
cannot eliminate the risk of accidental contamination or injury from hazardous
materials. If a hazardous material accident occurred, we would be liable for any
resulting damages. This liability could exceed our financial resources.
Additionally, hazardous materials are subject to regulatory oversight. Accidents
unrelated to our operations could cause federal, state or local regulatory
agencies to restrict our access to hazardous materials needed in our research
and development efforts. If our access to these materials is limited, we could
experience delays in our research and development programs. Paying damages or
experiencing delays
Page 23 of 27
<PAGE>
caused by restricted access could reduce our ability to generate revenues and
make it more difficult to fund our operations.
THE STOCK MARKET IS VOLATILE AND OUR STOCK PRICE COULD DECLINE
Market fluctuations or volatility could cause the market price of our
common stock to decline. In recent years the stock market in general and the
market for biotechnology- related companies in particular have experienced
extreme price and volume fluctuations, often unrelated to the operating
performances of the affected companies. Our common stock has experienced, and is
likely to continue to experience, these fluctuations in price, regardless of our
performance. These fluctuations could cause the market price of our common stock
to decline.
WE HAVE NEVER PAID DIVIDENDS
We have never paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
Page 24 of 27
<PAGE>
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibit 27
Financial Data Schedule (Exhibit 27 is submitted as an exhibit
only in the electronic format of this Quarterly Report on Form
10-Q submitted to the Securities and Exchange Commission).
b. Reports on Form 8-K
On February 2, 2000, the Company announced that Kenneth Lynn,
who had served the Company as Senior Vice President, Corporate
Development and Legal Affairs, relinquished his position as a
corporate officer and will move into a half-time role with
Valentis.
Page 25 of 27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALENTIS, INC.
--------------
(registrant)
Date: May 12, 2000 /s/ Benjamin F. McGraw III
--------------------------
Benjamin F. McGraw III
President, Chief Executive Officer, and
Chairman of the Board of Directors
Date: May 12, 2000 /s/ Bennet Weintraub
--------------------
Bennet Weintraub
Chief Financial Officer and Vice President Finance
(Principal Financial and Accounting Officer)
Page 26 of 27
<PAGE>
VALENTIS INC.
EXHIBIT INDEX
27 Financial Data Schedule (Exhibit 27 is submitted as an exhibit
only in the electronic format of this Quarterly Report on Form
10-Q submitted to the Securities and Exchange Commission).
Page 27 of 27
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